A further slowing in growth
Monday’s upbeat sentiment was short-lived with falls in equities and yields overnight.
Monday’s upbeat sentiment was short-lived with falls in equities and yields overnight. Disappointing earnings from Snap (-43%) after the close yesterday sent shares down across the board, particularly for tech stocks (NASDAQ ‑2.3%). Economic data has also been on the soft side with a notable plunge in US new home sales (‑16.6% m/m against -1.8% expected) and a sharp fall in the UK PMI (51.8 against 56.5 expected). Against that backdrop yields have fallen, particularly at the short end, with rate hike expectations pared. Words of caution by the Fed’s Bostic helped stabilise sentiment with the overall S&P500 closing -0.8% after having been -2.5% at one point. Whether this indicates the Fed put is starting to get near is unclear and even Bostic is supportive of two further 50bp hikes in June and July, and then re-assessing the situation in September. Interestingly the USD remains on the backfoot with non-USD havens up with USD/JPY -0.8%, while the EUR also rose +0.5%, with the DXY -0.3%.
First to an earnings warning from Snap which was the trigger for the turn in sentiment after the close on Monday. Snap’s CEO noted “the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month” and is contending with “rising inflation and interest rates, supply chain shortages and labor disruptions, platform policy changes, the impact of the war in Ukraine, and more. ” Snap’s disappointing guidance was extrapolated across the tech sector as an ominous side for advertising spend given the macro headwinds. Importantly i wasn’t only the tech sector that reported weak earnings with Abercrombie & Fitch reporting an unexpected lost and an eye watering rise in inventories of 45% y/y. The overall message from the earnings season is retailers and tech being surprised on consumers reigning in spending after stimulus in 2021. That may also mean having to shed workers taken on during the boom that occurred during the pandemic.
As for US New Home Sales they plunged, falling -16.6% m/m against -1.8% expected and -8.6% previously. The falls seen recently takes the annual rate of sales to 591k, the lowest level since April 2020, illustrating that surging mortgage rates are seeing housing activity fall back to pre-pandemic levels. A key uncertainty is whether activity levels fall below pre-pandemic levels given how far mortgage rates have risen in this cycle – the 30 year fixed rate mortgage is currently 5.38%, well up on the lows of 2.82% seen in 2021. Other data in the US was also softer than expected with the Richmond Fed Manufacturing Index at -9 against +10 expected. The details revealed a sharp all in new orders and shipments, broadly consistent with the messages seen in the other regional surveys such as the Empire and Philly Fed. The US PMIs were also a little softer with the composite at 53.8 against 55.7. The more important ISMs are out next week and will be watched closely given the reads in the regionals and in the PMIs.
Sentiment overnight seemed to stabilise around 2.00am Australia time which coincided with comments from the Fed’s Bostic (non-voter). Bostic on Monday had said he supported two further 50bp hikes in June and July, but thereafter the Fed could take stock. Today Bostic released an essay detailing his view and rationale. Bostic notes “Monetary policy makers must be mindful of those uncertainties and proceed carefully in tightening policy” and that “ We all must be ready for the unexpected to occur, assess how risks have changed when it does, and stay aware of shifts in the strength of the economy” (see Bostic: Monetary Policy amid Changing Labor Market Dynamics). It is unclear whether we are getting closer to the Fed put, but it is clear that growth headwinds are becoming more evident in the data, particularly stemming from the profit reporting season. The Fed of course remains focused on inflation, but if inflation reads were start to moderate, then Bostic has opened up the possibility of a Fed pause.
Yields have fallen with the market more concerned with the growth outlook, and perhaps with an ear to Bostic sounding caution on hawkish fed rhetoric. US rate hike expectations have been paired to 183bps of tightening for the rest of the year from 192bps on Friday. Markets now see end 2022 rate at 2.66% from 2.75% previously. This dynamic is captured by the sharp fall in the 2yr yield which fell -13.5bps to 2.48%. The 10yr yield is also down -9.2bps to 2.76%, with most of the move this time reflected in real yields which is at 0.18%, with implied breakevens down just -2.6bps to 2.58%.
Across the pond, growth concerns are also heightened in the UK where the UK PMIs were much weaker than expected with the Composite PMI at 51.8 against 56.5 expected and 58.2 previously. The fall in the index is the fourth largest on record and the largest when excluding the pandemic period. S&P noted: “ The disappointing performance of the UK economy contributed to a big pile of concerns for private sector business in May as business optimism dropped like a stone to its lowest level for two years amidst a shortage of skilled staff, weaker orders and worries about the cost of doing business”. Conditions are set to get tougher with the UK energy regulator Ofgem suggesting that the retail price cap will likely be lifted by another 42% in October 2022. UK markets fell in response to the news with GBP plunging to a low of 1.2472 before regaining some poise and is currently back above 1.25. UK yields also fell sharply (UK 2yr -12.3bps to 1.45%) and expectations for hikes from the BoE were also pared.
In contrast the Euro area PMI data fell by a less than in the UK and at 56.3 the services index remained at a level consistent with reasonable growth, with pent-up demand after the end of lockdown restrictions seen to be offsetting the impact of the war in Ukraine – the index certainly not at a level consistent with economic recession, but the risk remains weighed to the downside over coming months. Manufacturing was relatively weaker at 54.4, dragged lower by global factors such as supply chain issues.
On ECB policy, one day after President Lagarde signalled she was comfortable with two 25bps hikes in July and September, two of her colleagues have argued for a July hike of 50bps. Austrian Governor Holzmann said that a 50bps hike in July would be appropriate as it signals the Bank has understood the need to act and anything else risks being seen as soft. This was soon followed by Governor Kazaks who said that the Bank should not rule out a 50bps hike. Earlier in the day, the French Governor Villeroy de Galhau said that a 50bps rate hike isn’t yet consensus at the Bank. Expectations of a more hawkish ECB against a less hawkish Fed saw the EUR recover to a peak just under 1.0750 earlier this morning, its highest level in four weeks. Against a falling global rate backdrop and risk-off sentiment, JPY has been the strongest performer, with USD/JPY falling below 127. The overall USD DXY is on the backfoot, -0.3%, having been on the backfoot for the last week and a half.
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